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Spooky October: The debt ceiling and the impending financial crisis

Spooky Skeleton Debt
Hearing about the debt ceiling debacle

It's October which means it's time to hunker down and watch horror movies leading up to Halloween. But this year, there is something far scarier brewing in the witch's cauldron: a potential financial crisis.

On August 1st, the debt limit (or debt ceiling) of $28.4 trillion was reinstated after it was suspended in 2019 by The Bipartisan Budget Act of 2019. Immediately after the debt limit was reinstated, the U.S. Treasury announced a "debt issuance suspension period" where it's allowed to take "extraordinary measures" to borrow funds without exceeding the debt ceiling.

Why is this scary?

To break things down to simpler terms, the U.S. Treasury is only allowed to borrow so much, known as the debt limit or ceiling, and it has reached the point of squeezing every nickel and dime worth of cash it can under "extraordinary measures" in order to pay the bills without breaching the limit. If the Treasury runs out of cash, it risks defaulting on its debt obligations for the first time in history.

Certainly, the U.S. has plenty of cash, right? Well...about two weeks' worth. Per U.S. Treasury Secretary Janet Yellen, the current estimate is that the U.S. will run out of cash by October 19th unless the debt ceiling is raised.

What happens if the Treasury defaults on its debt obligations?

Considering it's never happened, economists are unsure of the exact consequences but have forecasted that it will result in financial calamity, a spike in interest rates, and a broad market sell-off sending the U.S. into an instant economic recession.

Many people who rely on government paychecks would be instantly affected:

  • 50 million seniors who rely on Social Security, Medicaid, and Medicare

  • Active-duty soldiers who would not know when their next paycheck is coming along with military retirees and veterans

  • 30 million families who rely on the Child Tax Credit would receive delayed payments

According to Mark Zandi, Chief Economist of Moody's Analytics, the fallout would wipe out as many as 6 million jobs and erase $15 trillion in household wealth.

Hope Remains

While the outcome of debt default is catastrophic, there is still hope to avoid it. The Debt Ceiling has been raised 78 times since 1960 and a deal between Republicans and Democrats is being worked on to raise it again. The debt ceiling was an issue being decided on last week but has carried over into this week, becoming a big deal in Washington.

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